Showing posts with label accounting tutorials. Show all posts
Showing posts with label accounting tutorials. Show all posts
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Benefits of statement of cashflows:

Posted by omer in Labels: , , , ,



The Statement:
·         Provides a tool to evaluate liquidity, solvency and financial stability of an entity.
·         Presents detailed summary of cash inflows and outflows, the data which is not directly provided by the income statement or income statement.
·         Serves as an indicator of amount, timing and extent.
·         Facilitates the comparability as the reporting is standardized
·         Emphasizes the qualitative aspect of the profit i.e what portion of profit represents cash flows.
·         Eliminates management bi as in estimating accruals, market values, and seletion from among accounting policies.
·         Measures the ability to pay cash dividend to owners, salaries to employees and payments to suppliers.
·         Recognizes profit when it is realized and not when it is accrued.
·         Evaluate the ability to of the entity to generate its cash requirements from normal trading operations.
·         Reports the data required for computation of internal rate of return.
·         Enables to decide the users of financial statement to asses whether the expansion is financed by external funds or through cash generated from operations.  

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Statement of Cash Flows:(Introduction)

Posted by omer in Labels: , , , ,

Cash flow statement is an integral part of financial statements of an entity. It represents the total changes in cash during the period. It is prepared and mandatory to show in the annual report of the any company. International Accounting Standard # 7 deals with the Statement of Cash flows and provides all necessary provisions for the preparation of cash flow statement.
During the business process an entity receives number of cash payments and made payments for the services and material to the suppliers and creditors. These are recorded in the books of accounts and in the year end related data is presented in the statement of cash flows. Cash flows arise from different activities like operations, financing and investing. The cash flows generated from activities of entity are divided in three main categories of Operations, investments and Financing. Cash flows are reported accordingly in the cash flow statement.
The following table will make easier to understand the cash flows according to activity
Transaction                                                               Activity Type
Payment to employees                                        operating activity
Purchase of Raw materials                                  operating activity
Cash sales                                                              operating 
Purchase of plant and machine                           Investing activity
Acquisition of Vehicles                                       Investing activity
Repayment of long term loan                              Financing Activity
Payments of dividends                                        Financing Activity
Causes for changes in cash flows:
Cash inflows:
                  Decrease in assets
                  Increase in liabilities
                  Increase in Shareholder`s Equity
Cash outflows:
                  Increase in assets
                  Decrease in liabilities
                  Decrease in shareholder`s equity

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